Tax Tips: Five Important Tax CreditsFrom The Internal Revenue Service
You might be eligible for a valuable tax credit. A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are even refundable, which means you might receive a refund rather than owe any taxes at all. Here are five popular tax credits you should consider before filing your 2009 Federal Income Tax Return:
The Earned Income Tax Credit is a refundable credit for certain people who work and have earned income from wages, self-employment or farming. Income, age and the number of qualifying children determine the amount of the credit. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit. The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, to enable you to work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses. The Child Tax Credit is for people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver’s Credit is available in addition to any other tax savings that apply. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs). The Health Coverage Tax Credit pays up to 80% of the health insurance premiums for eligible Trade Adjustment Assistance recipients and Pension Benefit Guaranty Corporation payees. You can complete IRS Form 8885, Health Coverage Tax Credit to claim the credit on your tax return. To determine if you’re qualified, or to find out how to receive the HCTC each month, visit IRS.gov and search for “HCTC.”
Tax Tips: Eight Ways to Avoid an Audit
No one wants to receive a visit from the IRS. Follow these eight pointers, and you're sure to lessen the odds that you'll find them standing on your stoop.
It might be considered a dirty word - all five letters of it. Audit is a word no one wants to hear, let alone experience. However, there are a few steps you can take to protect yourself and decrease the chances you'll become one of the chosen few. Here’s a quick checklist to help keep you in the clear or at least make it easier if you are chosen for audit.
Cross your t's and dot your i's - The easiest way to avoid an audit is to ensure your return is accurate. The best way to do that is to have your return prepared by a certified tax professional who knows your situation. A few mathematical errors alone might not get you into trouble, but several mistakes can imply that your return is sloppy and in need of a second look.
How you generate income does matter - There are also certain professions that attract more scrutiny. For example, those who are self-employed or receive large amounts of cash (like servers and taxi drivers, for instance) are always at higher risk for an audit than employees who receive a steady salary. Because studies have shown that more under-reporting occurs among the self-employed, the IRS is on the lookout for red flags, such as under-reported income or overstated deductions. It's important to keep excellent records to substantiate both the income and deduction items on your return in case they are ever questioned.
Alimony is taxable income - Not reporting taxable alimony payments that you receive can cause big trouble. The IRS matches deductions for alimony from one spouse with the alimony income reported by the other. So be sure to report any alimony that you receive.
Be accountable for automobile logs - One of the most commonly audited items is automobile expenses for self-employed persons or employees who use their cars for business purposes. The key to protecting yourself here is to keep detailed records of your mileage on a daily basis, if possible. Try to keep a log that charts the beginning and ending odometer readings along with the location and reason for the trip. Your tax professional can then help you determine how many of those miles are deductible as business use miles.
Keep good records of your itemized deductions - Large amounts of itemized deductions can make you a target for an audit, but you should still claim every deduction you're entitled to by law. Claiming only valid itemized deductions and maintaining good records for the deductions that you claim are the keys to audit protection. Taxpayers should be aware of the important recordkeeping rules affecting the eligibility of deductions for charitable contributions. For example, to deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement, or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. Contributions of clothing or household items must be in good or better condition and you must get a receipt from the charity. Keep an itemized list of the items you donated, along with the value assigned to each item.
High DIF can hurt you - When you file your return with the IRS, they use a proprietary formula to calculate your Discriminate Information Function (DIF) score. Returns with the highest DIF scores are the most likely to be selected by the IRS because they pose the best chance for the IRS to collect additional taxes, interest and penalties. The best way to avoid a high DIF: Make sure to report all taxable income – from wages to interest earned on your bank accounts as well as interest earned on investments.
Take care when reporting the sale of stocks or bonds - The IRS also receives information about the sales price of your stocks and bonds. The IRS looks to see that the amount reported on Form 1099-B is reported on your return, so be sure to report the amount shown on the 1099-B as the sales price and report your basis as the cost. The difference between the sales price and the basis is your gain or loss. You need to separate short-term gains and losses from long-term gains and losses. A tax professional can help you complete your return accurately to avoid any mistakes.
Tax Tips: 10 Common Tax Bloopers
Here’s our list of 10 common tax return missteps:
1. Errors involving social security numbers. This includes incorrect, missing or numbers that don't match the names on the return.
2. Required documentation not attached to the return, such as W-2s, 1099s, etc.
3. The tax return is not signed by the taxpayer.
4. Incorrect filing status recorded on the return.
5. Math errors on the return. A math mistake, the IRS says, need not be a calculation error. It can be as simple as copying a number incorrectly, like reporting wages of $29,472 as $24,972.
6. The return includes incorrect forms and schedules or is missing forms and schedules.
7. Use of the standard deduction when itemizing deductions would have saved the taxpayer more money. Don’t forget, the Government Accountability Office (GAO) estimates that over a half-million taxpayers could save by itemizing.
8. Not completing the taxable benefits worksheet for social security benefits.
9. The taxpayer either fails to claim credits or figures credits in error. Typical examples include the child tax credit and the earned income credit. Either the taxpayer does not understand credit eligibility or calculates the credit incorrectly.
10. Omitting income items from the return.
Tax Tips: Putting Job-Related Tax Deductions to Work for You
Many people have job-related expenses like uniform costs, association dues, and more. What some may not realize is that these expenses may qualify for a tax deduction.
Understanding job related tax expenses.
There are a few ways to look at job related expenses:
If your employer has an accountable plan set up that fully reimburses your expenses, then the reimbursements are not reported as part of your wages and you cannot deduct these expenses.
If your employer does not have an accountable plan and reimburses you for your expenses, then this reimbursement is included in your wages and you may be able to deduct the expenses as miscellaneous itemized deductions (we’ll get to those in just a moment.)
If you pay out-of-pocket for job related expenses and you are not reimbursed by your employer, then you may be able to deduct the expenses as miscellaneous itemized deductions.
Also, be aware that you can't deduct the cost of any item for which you would not have been reimbursed if you'd asked for the reimbursement.
What qualifies for a job related tax deduction?
Tax-deductible job expenses must be ordinary and necessary. ‘Ordinary’ means it is common and accepted in your trade, business or profession. ‘Necessary’ means it is appropriate and helpful to your business, although it does not have to be required by your employer in order for it to qualify as ‘necessary’.
Here are some examples of job related expenses that may qualify for a tax deduction:
Employer-required physical examinations
Office supplies not provided by your employer
Professional or trade association dues
Research, lecture and writing expenses
Safety clothes and equipment
Personal tools and equipment
Claiming job related expenses as miscellaneous itemized deductions.
You claim your job related expenses (like those listed above) as miscellaneous itemized deductions. You can only deduct the amount that is more than 2% of your adjusted gross income. For example, let’s say you have $3,000 in qualifying expenses. And, your adjusted gross income is $50,000. You would be able to deduct $2,000. Here is how it works:
Qualifying expenses – (adjusted gross income x 2%) = your deduction.
$3,000 – ($50,000 x 2%) = $2,000
You report these miscellaneous itemized deductions on line 21 of Schedule A and on Form 2106.
Claiming business travel expenses.
You may be able to claim expenses you incur for business travel. You can’t claim the travel costs of your daily commute, but if you travel to another location as part of your job, that expense may be tax deductible – even if that location is within the same metropolitan area where your job is. Additionally, you may be able to claim expenses for business travel outside of your metropolitan area. Generally, you can deduct 50% of the cost of qualifying meals and entertainment that you incur on business travel.
Taking advantage of the home office tax deduction.
If you use a portion of your home regularly and exclusively for business, you may be able to take a home office deduction. This allows you to deduct expenses for that portion of your home. Qualifying expenses include, but are not limited to, mortgage interest, taxes, rent, insurance, and utilities. You may take this deduction only if the use of your home is for your employer’s convenience. Also, special rules apply if your employer pays you rent for the portion of the home you use for business.
Check with your employer to understand how job-related expense reimbursement is handled at your company.
Keep a list of expenses throughout the year that you think may qualify as tax deductions.
Keep a log of unreimbursed travel expenses you incur during the year.
Tax Tips: 5 Tax Breaks Every New Parent Should Know About
Having a baby brings with it all kinds of joy, along with some pretty significant tax relief. How you file your taxes and claim your new dependent can help you reduce your taxable income. And, taking advantage of available tax credits can help you lower your tax bill dollar for dollar.
Here’s what you need to know to make sure you don’t miss out on your eligible child tax deductions and savings:
Claiming Your Child as a Dependent
Claiming your child as a dependent is an important first step in taking full advantage of your family tax benefits. You’ll be able to claim an additional personal exemption for each child, reducing your overall tax burden. Plus, you’ll open the door for a number of potential tax credits.
Child Tax Credit
The Child Tax Credit may entitle you to a credit of up to $1,000 per qualifying child in 2010. This credit is available regardless of your filing status. However, your tax credit may be reduced based on the amount of your modified adjusted gross income.
Earned Income Credit (EIC)
The EIC is a tax credit available to low-income workers. The amount of the credit varies depending on your income and the number of qualifying children you have.
Child and Dependent Care Tax Credit
If you pay someone to look after your child while you work or look for employment, you may be entitled to the Child and Dependent Care Tax Credit. The credit is equal to 20% to 35% of your qualifying child care expenses, depending on your adjusted gross income. You may be able to include up to $3,000 of expenses if you have one qualifying child and up to $6,000 of expenses if you have more than one qualifying child.
Filing as Head of Household
If you're a parent and are not married, (your marital status on the last day of the year determines your status for the entire year), or you are considered unmarried for tax purposes, you may be able to file as Head of Household and qualify for a higher standard deduction than when filing as Single. You'll also be eligible to use a more favorable tax table or rate schedule.
Tax Tips: Top 10 New Year Tax Resolutions
You’ve just finished your year-end planning for your 2009 tax return. Now it’s time to give some thought to the 12 months ahead. What are the most important steps you can take in 2010 to improve your financial health and shed unwanted tax liabilities?
I will take charge of my finances – Take control of your financial future by developing a detailed understanding of your income and expenses and by establishing clear financial goals.
I will keep better records – When receipts get lost, it’s easy to miss out on deductions for charitable contributions, medical and educational expenses and business costs to name a few. This year, take a minute to develop a simple, fail-safe method for hanging onto those annoying little slips of paper. You’ll be glad you did when next tax year rolls around.
I will save for retirement – Start now. It gets here sooner than you think. Not only will you be protecting your future, but you’ll enjoy tax benefits today.
I will review my W-4 withholding – Fine-tuning your payroll deduction gives you the opportunity to increase cash flow, reduce year-end tax liability or boost your refund. Think about your financial requirements and objectives and take command of your paycheck.
Remember, the Making Work Pay tax credit, introduced in 2009, is in effect through 2010. If you are one of the estimated 15 million taxpayers negatively impacted by the credit through a reduced refund or increased balance due on your Tax Year 2009 return, you may want to adjust your W-4 withholding through your employer for calendar year 2010.
I will file my taxes electronically
I will know my tax rights – Because the IRS will allow taxpayers to amend returns filed in any of the prior three years, consider taking a Second Look. Let one of our tax professionals check your past three tax returns to ensure that no deductions or credits were overlooked, the right filing status was claimed and the tax calculated correctly.
I will purchase a home – Buying a home can be one of the most positive and far-reaching financial decisions you will make. Not only are you building equity in an asset that typically increases in value, but you’ll reap a number of benefits and deductions at tax time. Eligible first-time home buyers can claim up to an $8,000* first-time home buyer tax credit by entering into a contract by April 30, 2010.
Existing homeowners in the market for a new home, may also benefit from a new tax credit worth up to $6,500*. To be eligible, you must have owned and lived in your current home continuously for five of the last eight years to claim the credit. Again, you must have entered into a contract on the home by April 30, 2010 and close by June 30, 2010.
*A house must be valued at less than $800,000 to be eligible.
I will start saving for my child’s education – In 15 to 20 years, it will take an estimated $170,000 to $230,000 to finance your child’s college tuition and living expenses, depending on the type of school your child chooses to attend. So get started now. There are a wide range of college savings plans out there, and even a small regular contribution will grow and compound dramatically over time.
I will claim my education credits for classes – The federal government has created several important credits and deductions designed to help defray the cost of higher education, including an expanded Hope credit for tax years 2009 and 2010. Talk to a tax or financial professional about how these options might help you.
I will deduct my student loan interest – Provided you fall within certain income guidelines, the IRS allows you to deduct the interest paid on any loan used exclusively to pay for education expenses (including room and board) for yourself, your spouse or a dependent.